The first documented purchase using bitcoin involved fast food. In 2010, Laszlo Hanyecz spent 10,000BTC on buying some takeaway pizzas from a fellow crypto enthusiast. The value of the transaction at the time was about £25. If he’d curbed the carbs and hung on to that money, he’d have been worth about £5bn at bitcoin’s peak.
Hanyecz later explained that he had “no regrets” about this – someone had to get things started.
Where is it possible to spend cryptocurrencies on consumer goods today? Starbucks takes crypto via the Bakkt app, while Home Depot accepts a range of coins via the Flexa checkout systems installed in its DIY stores. In fact, about 15,000 businesses worldwide accept bitcoin, according to research by jobsite Zippia.
Other studies have indicated a strong pent-up desire among both merchants and consumers to shift to crypto. Based on polls conducted in December 2021, Deloitte’s Merchants Getting Ready for Crypto report suggested that 85% of organisations had placed a “high priority” on enabling crypto as a payment choice. The key reason for this? Customer demand. The surveys found that 64% of consumers had a significant interest in digital currencies, while 85% of merchants believed that crypto payments would be ubiquitous among suppliers within five years.
The cryptocurrency meltdown that has occurred since that research may have dented their confidence. Bitcoin has plummeted from £38,000 at the end of 2021 to about £14,000 as this report goes to press. Cryptos tend to move in sync and, sure enough, other prominent coins – including ethereum, solana and dogecoin (Elon Musk’s personal favourite) – have suffered similar crashes.
Such factors present some fundamental questions for any business that’s thinking about accepting cryptocurrencies. Apart from the practical matters of how to receive and process payments, are the reasons for doing so sufficiently compelling, given the risks posed by the terrifying volatility associated with crypto?
The benefits of taking crypto
Let’s start with the advantages. “There are several pros for businesses,” according to Roman Matkovskyy, assistant professor of finance and accounting at the Rennes School of Business.
These include “faster processing times, particularly for payments from abroad; potentially higher transparency; and lower transaction fees”, he says. “There is no cost for direct crypto payments from a customer and a maximum transaction fee of 1% if these are routed through a tool such as Coingate or Bitpay. That compares with the standard fee of 2.9% plus 30¢ per transaction for most credit card processors.”
The cost of sending crypto from one wallet to another depends on both the coin and the activity on the blockchain used. A fundamental mechanism of bitcoin and other cryptos is to reward participants for processing transactions. If activity on a blockchain increases, or there is a backlog of payments for processing, these rewards increase to incentivise more processing.
Being one of the early cryptocurrencies, bitcoin suffers from inefficiencies, so its transaction costs are relatively high. The same goes for ethereum, for which the ‘gas fees’, as these costs are known, tend to fluctuate between £12 and £35 (although they spiked above £500 for a spell in 2020). This makes only higher-value transactions justifiable. A substantial import order via ethereum, for instance, might save significantly on traditional payment methods.
But parallel technologies offer radical improvements. The Bitcoin Lightning Network enables the smallest tradable unit of a bitcoin – a satoshi, valued at 0.00000001BTC – to be sent. Up to 1 million transactions a second are possible on the network and the fee per transaction is less than 1¢.
“The Bitcoin Lightning Network can theoretically replace existing payments for fiat transactions,” says Matkovskyy, who cites Solana Pay as another promising project with low fees.
How to avoid the rollercoaster
Volatility is the problem that puts transaction fees in the shade. There’s no point in saving a percentage point on processing costs if the currency you’re trading in loses 10% of its value in a week.
But there is a way to avoid volatility altogether. Stablecoins are cryptos that are pegged to a traditional currency such as the dollar. They include tether, binance USD and dai. These enable their users to hold virtual dollars without their capital leaving the crypto universe.
“Volatility can be removed completely from crypto payments for both seller and buyer,” says Jordan Bentley, product manager of crypto at FIS, a provider of payment tech to banks. “Customers are shown an exchange rate at the point of purchase, often locked in for 15 minutes, and merchants can choose to receive settlement in fiat, offering certainly regarding the amount.”
Bentley adds that the use of stablecoins can keep volatility at bay for the long term. “Stablecoins such as Circle’s USD coin, which is pegged at 1:1 with the dollar, also remove all volatility from crypto payments, enabling rapid settlements. They are therefore much more suitable for merchants that are just gaining familiarity with crypto and digital wallets,” he says.
But not everyone agrees that stablecoins are deserving of their name. For instance, the most popular stablecoin, tether, stands accused of lacking transparency. There are theories that it may not have the reserves it claims, which would make it vulnerable to a run if enough users were to cash out. Indeed, The New York Times recently published an article with the headline “Tether: the coin that could wreck crypto”.
The founder of dogecoin, Billy Markus, recently opined: “To anyone worrying about binance and / or tether collapsing, if either does it’s pretty much game over.”
The practicalities of crypto payment
To be able to accept crypto payments, you must choose a wallet or crypto banking service, such as Nexpay, BitPay or Worldpay.
The Geneva office of Saffery Champness, a provider of trustee services to asset managers, is planning to take crypto payments via Coinify. It will be able to accept 25 currencies, including bitcoin and ethereum.
“We need to transact with crypto-native clients, but crypto is not core to our business,” says its director of marketing, Siobhan Moret. “Using a merchant service like Coinify is a good option for us. It’s quick to set up and inexpensive. It offers payment options in a wide variety of coins and converts almost immediately to Swiss francs. This offers us maximum flexibility at low pain.”
On top of the technical challenges of accepting crypto payments, there are compliance matters to consider. In the UK, the financial services and markets bill that’s progressing through Parliament should give the government new legal powers over certain crypto-related activities.
Some fiat-to-crypto exchanges – for instance, Coinbase, Kraken and eToro – are regulated by the Financial Conduct Authority. But the watchdog did not approve the Bahamas-regulated FTX exchange, which imploded in November with the loss of an estimated £6.5bn in customers’ funds.
Yet, despite all the downsides associated with it, crypto will be the next big thing in B2B and B2C payments – if the claims of parties with an interest in its success are to be believed. A recent survey by Pymnts.com, a news website for the payments industry, for instance, has indicated that 23% of merchants are already accepting payments via crypto-native wallets.
People are sceptical about crypto and the claims made by its proponents with good reason. Accepting payments in pounds, dollars and euros may not be sexy and the transaction fees are certainly steep. But the CEO of your high-street bank is unlikely to disappear with all your money in his suitcase.One of the oldest mottos of commerce is caveat emptor: let the buyer beware. For any entity thinking about taking crypto payments, perhaps it should be a case of caveat venditor: let the seller beware.